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December 18, 2013

Fed to Start Tapering, Easing QE Program

Fed institutes ‘modest’ $10 billion reduction in its bond-buying program to $75 billion per month

Fed Chairman Ben Bernanke. (Photo: AP)

The Federal Open Market Committee announced Wednesday that it would start reining in its QE program by instituting a “modest” $10 billion reduction in its monthly bond-buying program to $75 billion per month.

Beginning in January, the FOMC said, it will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month, which would slow down its stimulus program called quantative easing.

At his last press conference before he steps down as Federal Reserve Board Chairman, Ben Bernanke said Wednesday that further tapering will “be data dependent.” However, he said he anticipated that the Fed would “probably do a measured reduction” at each meeting.

“If the economy slows or we are disappointed we could skip a meeting or two, but if things pick up we could go a bit faster," he said. "I anticipate similar moderate steps through most of 2014.”

Like other economists, Jim O'Sullivan, Chief U.S. Economist at High Freqency Economics, had said that while he thought tapering "was quite possible today," HFE thought the Fed "would hold off for one more meeting." Markets appear to be taking the news in stride, O'Sullivan said, "with bond yields little changed and equities rallying by close to 1%."

Consistent with the message on tapering, O'Sullivan said that "the tone on growth was reasonably positive."

Bernanke said at the press conference that “We think inflation will gradually move back to 2%." However, inflation might rise due to health care costs, he noted. “We take this very seriously; inflation cannot be picked up and moved where you want it. We are committed to make sure inflation does not remain too low” and “get it back to target.”

The unemployment rate that stood at 7% in November will continue to decline, Bernanke said. When the Fed started its QE program in September 2012, he said that the unemployment rate was expected to rise to more than 8%. “Economic growth will support further job gains,” Bernanke said. FOMC expects that the 6.5% unemployment threshold will be reached by the end of 2014. "We will continue to keep rates low well beyond the point that unemployment hits 6%," Bernanke said.

Senate Majority Leader Harry Reid, D-Nev., said Wednesday that the Senate would consider Janet Yellen’s nomination to lead the Federal Reserve this week.

The Committee said in its statement before Bernanke held his press conference that it would “closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability.”

The FOMC added: “If incoming information broadly supports the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings.”

However, FOMC continued, “asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.”

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